Evergrande seeks US court nod for $32B debt overhaul as China economic fears mount

A man walks past a No Entry traffic sign near the headquarters of China Evergrande Group in Shenzhen, Guangdong province, China. REUTERS/Aly Song/File Photo

HONG KONG/NEW YORK  -Embattled developer China Evergrande Group has filed for bankruptcy protection in a U.S. court as part of one of the world’s biggest debt restructuring exercises, as anxiety grows over China‘s worsening property crisis and a weakening economy.

Once China‘s top-selling developer, Evergrande has become the poster child of the country’s unprecedented debt crisis in the property sector, which accounts for roughly a quarter of the economy, after facing a liquidity crunch in mid-2021.

The developer has sought protection under Chapter 15 of the U.S. bankruptcy code, which shields non-U.S. companies that are undergoing restructurings from creditors that hope to sue them or tie up assets in the United States.

The filing is procedural in nature, but the world’s most indebted property developer with more than $300 billion in liabilities has to do it as part of a restructuring process under U.S. law, two people familiar with the matter said.

The sources declined to be named due to the sensitivity of the matter.

Evergrande declined to comment.

Evergrande‘s offshore debt restructuring involves a total of $31.7 billion, which include bonds, collaterals and repurchase obligations. It will meet with its creditors later this month on its restructuring proposal.

A string of Chinese property developers have defaulted on their offshore debt obligations since then, leaving unfinished homes, plunging sales and shattering investor confidence in a blow to the world’s second-largest economy.

The property sector crisis has also fanned contagion risk, which could have a destabilizing impact on an economy already weakened by tepid domestic consumption, faltering factory activity, rising unemployment and weak overseas demand.

A major Chinese asset manager missed repayment obligations on some investment products and warned of a liquidity crisis, while Country Garden, the country’s No.1 private developer, has become the latest to flag a stifling cash crunch.

All of this comes at a time when property investment, home sales and new construction have contracted for more than a year.

Morgan Stanley this week followed some of the major global brokerages to cut China‘s growth forecast for this year. It now sees China‘s gross domestic product (GDP) growing 4.7 percent this year, down from an earlier forecast of 5 percent.

China is targeting 5 percent annual growth for this year, but an increasing number of economists are warning that it could miss the goal unless Beijing ramps up support measures to arrest the decline.

The China economic and property woes as well as the absence of concrete stimulus steps have sent a chill through global markets. Asian shares were headed for a weekly loss of 2.8 percent, the third straight week of declines. Chinese blue-chips dropped 0.5 percent and Hong Kong’s Hang Seng Index slumped another 1.3 percent.

China is expected to cut lending benchmarks at a monthly fixing on Monday, with many analysts predicting a big reduction to the mortgage reference rate to revive credit demand and shore up the ailing property sector.

Debt restructuring

In response to the deepening property market crisis, the central bank reiterated it would adjust and optimize property policies, according to its second-quarter monetary policy implementation report published this week.

Since the sector’s debt upheaval unfolded in mid-2021, with Evergrande at the center of the turmoil, companies accounting for 40 percent of Chinese home sales have defaulted, most of them private property developers.

As developers scramble to ease investors’ concerns, Longfor Group, China‘s second largest private developer, said on Friday it would speed up its “profit structure” in response to the changes of supply and demand in the real estate market.

Evergrande announced an offshore debt restructuring plan in March, expecting it to facilitate a gradual resumption of operations and generation of cash flow. It is now gathering creditor support to complete the process.

An affiliate of the developer, Tianji Holdings, also sought Chapter 15 protection on Thursday in Manhattan bankruptcy court.

In a filing in the Manhattan bankruptcy court, Evergrande said that it was seeking recognition of restructuring talks underway in Hong Kong, the Cayman Islands and the British Virgin Islands.

The company proposed scheduling a Chapter 15 recognition hearing for Sept. 20.

In June last year, another Chinese developer, Modern Land (China) Co. Ltd, which missed payments on its offshore bonds that were due in Oct, 2021, had filed a petition for recognition under Chapter 15 of the bankruptcy code in New York.

Trading in China Evergrande shares has been suspended since March 2022. Shares of Evergrande Services plunged as much as 20 percent on Friday, while China Evergrande New Energy Vehicle Group lost as much as 17 percent.